Arizona Real Estate License Practice Exam 2025 - Free Real Estate Practice Questions and Study Guide

A significant disadvantage of a corporation is double taxation. This occurs because corporations are treated as separate legal entities. As a result, the corporation itself pays taxes on its profits at the corporate tax rate. Then, when these profits are distributed to shareholders in the form of dividends, the shareholders must also pay taxes on that income at their individual tax rates. This two-tier taxation can reduce the overall return on investment for shareholders, making it a notable drawback compared to other business structures where income is only taxed at the owner or personal level.

In contrast, limited liability protects shareholders from being personally liable for the corporation’s debts beyond their investment in the company. Officers appointed by a board of directors help to manage the corporation, which is standard practice for large entities and not a disadvantage. Additionally, living in perpetuity is an advantage of corporations, as they do not cease to exist if ownership changes or shareholders die, ensuring continuity of the business.